By Steve Nichol and Matthew Friedlander
In its latest offering, “CLC COVID-19 Claims and Disputes in Construction” the Construction Leadership Council (CLC) predicts that disputes related to COVID-19 are set to rise in 2021. While the optimist may hope that parties will continue to or aim to work collaboratively in order to find workable commercial solutions to claims arising from the global pandemic, the realist knows that such disputes are inevitable.
From data gathered by the CLC, it appears that commercial behaviour is hardening in the supply chain and that many of the more complex COVID-19 disputes from 2020 have been left to a later date; the CLC expects that parties will turn their attention to them in 2021. Throw into the mix Brexit, financial year-ends and the dire economic outlook for 2021, and everything points towards to an increase in the likelihood of disputes.
Nonetheless, there will be those who will be able to navigate these challenging times by settling disputes without the need for protracted legal proceedings and thus managing to minimise legal spend.
Where a settlement is reached, it is critical that the terms of agreement are recorded in a binding contract to entrench each of the parties’ positions. A well-written settlement agreement will, amongst other requirements, clearly define the dispute that is being settled as well as the terms of settlement. Most importantly, should one party renege on the agreement, the innocent party has a clear contractual remedy without having to re-open the original dispute.
With this in mind, the recent case of Aqua Leisure International Ltd v Benchmark Leisure Ltd (2020) is salutary reminder of what is required for a binding settlement agreement.
Benchmark was the site developer for a water park. It instructed Aqua pursuant to a standard form JCT Design and Build contract entered into on 13 July 2015. The project reached practical completion in August 2016 and in September 2016 Aqua made a final interim application for payment of around £190k. No notice to pay less was served and only £20,000 of the application was paid by Benchmark.
The dispute proceeded to an adjudication where in July 2017 Aqua was awarded the sum of around £143k (plus VAT) in respect of the principal claim (amongst other sums).
As there were some outstanding warranty works, the parties met in August 2017 to discuss settlement of the entirety of their dealings. In summary, the parties recorded a payment resolution in the total sum of £217,998 (plus VAT) which would be paid in staggered payments over a period of time, with a fixed and final sum in the amount of £110,000 underwritten by a guarantee from the Benchmark’s parent company.
In emails between the parties the payment resolution was expressed to be “without prejudice and subject to contract”. Aqua confirmed that it would draft the settlement and guarantee and forward it to Benchmark as a binding agreement once signed. Aqua sent an agreement to Benchmark but Benchmark did not sign it.
Between December 2017 and May 2018, Aqua chased Benchmark asking it to sign the written agreement on no fewer than 6 occasions. In May 2018 Benchmark wrote to Aqua and explained that there would be no parent guarantee. The sums due under the adjudicator’s decision were not paid in full and neither were the sums set out in the “payment resolution”. The “resolution” itself was never committed to writing and no guarantee was ever signed
Aqua applied for summary judgment to enforce an adjudicator’s decision ordering Benchmark to pay an outstanding balance of around £119k. Benchmark defended the application on the basis that the adjudication award had been superseded by agreement (i.e. the payment resolution), citing evidence that as Benchmark had made some of the first payments set out in the payment resolution, the parties intended to comply with the payment resolution. Clearly this was a problematic argument for Benchmark given that it had refused to sign and failed to comply with the resolution.
The question that the Court held that it had to decide was whether there was a reasonable prospect of establishing at trial that the parties had agreed to enter into a binding contract (a new contract) without the need for all terms to be reduced to writing.
It is well established law that “Whether [in a without prejudice subject to contract case] the parties agreed to enter into a binding contract, waiving reliance on the “subject to [written] contract” term or understanding will again depend upon all the circumstances of the case, although the cases show that the court will not lightly so hold.” (RTS v Molkerei  1 WLR 753)
Accordingly, and in no uncertain terms, Judge Bird dismissed Benchmark’s defence and held that there was no binding agreement that had been entered to between the parties. The judge held that the case “is a paradigm example of why the court “will not lightly hold” that a condition that negotiations and agreements are “subject to contract” has been superseded. The parties set their own rules of engagement. They agreed that there would be no binding contract until the terms were reduced to writing and signed off. They clearly envisaged that an agreement would be reached but that it would not be enforceable until the formalities had been observed. The presence of an agreement that was acted on, is not therefore without more enough to indicate that the parties intended to be bound.”
For Aqua, this was an example of a less frequent occasion where a party preferred the option of the Court deciding that there was no binding agreement as it had the adjudicator’s decision to fall back on. However, for those seeking to finalise disputes by negotiating a settlement with another party, it is far more likely that it will be with a view to avoiding adjudication or legal proceedings in the first place.
It is common practice that when parties are negotiating a settlement to mark correspondence and draft agreements ‘without prejudice and subject to contract’. This case is a reminder that in those circumstances, until the settlement agreement is finalised, committed to paper and signed by both parties there is a risk that the agreement will not binding irrespective of whether the agreement was acted upon.
So the moral of the story is to remember the paperwork. Commit the settlement agreement to writing and get it signed as soon as possible.